BUILDING
GENERATIONAL WEALTH

This guide will demystify the concept of generational wealth, exploring what it is, why it matters, and how you can start building it today.

---

Have you ever dreamt of providing financial security not just for yourself, but for your children and grandchildren? This is the essence of generational wealth – assets passed down through families to create lasting financial stability.

Tax treatment differs across jurisdictions.

What Is Generational Wealth?

Generational wealth refers to assets passed down from one generation to the next, creating financial stability that extends beyond a single lifetime. It encompasses property, investments, businesses, and valuable knowledge that can benefit multiple generations.

Defining Generational Wealth

At its core, generational wealth represents more than just tangible investments. It also includes intangible assets such as business ownership, intellectual property, and financial literacy.

The key distinction is that these assets are specifically intended to outlive their original owner, providing ongoing benefits to children, grandchildren, and beyond.

Many people associate generational wealth with ultra wealthy families, but the truth is that building a lasting financial legacy is achievable for ordinary investors too. Whether it’s a modest property portfolio, a well-funded pension, or a diversified investment account, the principle remains the same: creating assets that can grow and be transferred to future generations.

Beyond Money: The Importance of Values and Education

While financial assets form the foundation of generational wealth, the knowledge and values passed down are equally crucial. Teaching children about budgeting, saving, and investing, creates a multiplier effect that may transform modest inheritances into substantial wealth over time.

Research shows that without proper financial education, inherited wealth often disappears within two to three generations. By contrast, families who prioritise financial literacy alongside wealth accumulation tend to maintain and grow their assets across multiple generations. This educational component transforms generational wealth from a one-time windfall into a sustainable family advantage.

Getting Started: Building Your Foundation

Creating generational wealth begins with establishing strong financial habits and clear objectives. Start by assessing your current position, setting achievable goals, and developing a systematic approach to saving and investing for the future.

Setting Financial Goals for the Future

The first step in building generational wealth is defining what success looks like for your family.

Begin by asking yourself fundamental questions: What kind of life do you want to provide for your children? What opportunities do you want to create for future generations? These answers will shape your financial strategy and help you determine how much wealth you need to accumulate.

Consider using “SMART” goals for effective planning. Each factor can help to provide a framework for turning these aspirations into actionable plans if you remember to make your plans:

• Specific
• Measurable
• Achievable
• Relevant
• Linked to time-bound objectives

For instance, rather than vaguely aiming to “build wealth,” you might set a goal to accumulate $500,000 in investment assets by age 60, or to purchase a rental property within the next five years. Breaking down these larger objectives into smaller milestones makes the journey less overwhelming and helps to maintain motivation.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Nobel Prize winning economist, Paul Samuelson

Creating a Budget and Saving Consistently

Building generational wealth requires discipline and consistency in your saving and investing habits.

Creating a comprehensive budget that tracks your income and expenses may help you to identify areas where you can reduce spending and increase savings. Even small amounts of regular savings can grow over time through the power of the compounding effect.

You may want to consider implementing the 50/30/20 rule as a starting point for your wealth building. That approach will allocate 50% of your income to necessities, 30% to wants, and 20% to savings and debt repayment. If your income grows, you might aim to increase the percentage dedicated to savings and investments. Automated schemes such as recurring investment strategies allow for contribution sizes to be amended over time and also instil a degree of discipline into a savings plan.

Exploring Investment Options: Stocks, Bonds, and More

Once you have established a savings habit, one option is to consider putting your money to work through investing. The investment landscape offers numerous opportunities, each with different risk levels and potential returns:

• Stocks represent ownership in companies and offer the potential for long-term growth.
• Bonds provide relatively more stable returns through fixed interest payments.
• Property can generate rental income or dividends as well as potential capital appreciation over time.

For beginners, index funds offer a possible starting point. These funds provide diversification by investing your capital across a large number of companies, mitigating the risk of one single holding underperforming. As you gain experience and confidence, there is the option to explore investing in individual stocks, sector-specific funds, or alternative investments such as real estate investment trusts (REITs).

Investing for the Long Term

Long-term investing forms an integral part of generational wealth building. By maintaining a patient, disciplined approach and allowing your investments to compound over decades, you can transform modest contributions into considerable wealth.

Diversification: Protecting Your Investments

Diversification acts as your portfolio’s insurance policy. By spreading investments across different asset classes, sectors, and geographical regions, you reduce the impact of any single investment’s poor performance.

A well-diversified portfolio might include domestic equities, international stocks, bonds, and property investments.

Consider this practical example: during the 2008 financial crisis, while banking stocks plummeted, defensive sectors such as utilities and consumer staples held their value better than those in the financial sector. Investors with diversified portfolios were positioned to experience less severe losses than those concentrated in the finance sector. This principle becomes even more critical when building wealth is intended to last generations.

Understanding Risk Tolerance and Time Horizon

Investment plans should align with both your risk tolerance and time horizon. Buying assets with volatility levels you are comfortable with will make it easier to hold on to positions and avoid panic selling when markets are distressed, and will let your strategy mature according to its intended timeline.

Market corrections are an inevitable part of investing, but younger investors, and those who don’t need to access their investment for many years, are in a better position to allow their portfolios to recover from market downturns. This longer time horizon introduces the possibility of increasing the proportion of capital allocated to growth-oriented investments like stocks.

As you approach retirement or wealth transfer milestones, gradually shifting towards more conservative investments will help to reduce the risk of a short-term market downturn impacting your wealth. A common rule of thumb suggests subtracting your age from 100 to determine your stock allocation percentage. For instance, a 30-year-old might hold 70% stocks and 30% bonds, while a 70-year-old might reverse this allocation.

The Power of Compounding

Albert Einstein allegedly called compound interest “the eighth wonder of the world,” and for good reason. transforms time into your greatest ally in building wealth. Even modest regular investments can benefit from compounding given enough time.

Consider this example: investing $200 monthly with an average 7% annual return would grow to approximately $102,000 after 20 years, but if annual returns are reinvested, that total is nearer to $236,000 after 30 years. The final decade alone adds more value than the first two decades combined. This exponential growth illustrates why starting early and maintaining consistency are crucial for generational wealth building.

With a solid investment foundation in place, the next crucial step involves planning how to efficiently transfer your accumulated wealth to future generations.

Passing on Your Legacy

Successfully transferring wealth to future generations requires careful planning and preparation. Without proper estate planning and financial education, even substantial wealth can quickly dissipate, making these final steps crucial for preserving your legacy.

Estate Planning: Wills and Trusts

Estate planning ensures your wealth will transfer according to your wishes while minimising tax implications. At minimum, every adult should have a valid will specifying how assets should be distributed. However, building generational wealth can involve adopting a more nuanced approach.

offer greater control over how and when beneficiaries receive their inheritance. For instance, a discretionary trust might release funds gradually as children reach certain ages or achieve specific milestones, preventing young heirs from squandering their inheritance. In addition, certain trust structures are designed to provide potential inheritance tax benefits.

Working with qualified estate planning professionals will ensure that your plans comply with current tax laws and regulations. Regular reviews are essential, as both tax laws and family circumstances change over time.

Financial Literacy: Educating the Next Generation

Possibly the most valuable inheritance you can provide is financial knowledge. Studies consistently show that families who prioritise financial education maintain wealth across multiple generations more successfully than those who focus solely on asset accumulation.

Start financial education early with age-appropriate lessons:

• Teach young children about saving and budgeting through pocket money
• Introduce teenagers to investment concepts through junior savings schemes
• Involve young adults in family financial discussions and investment decisions

Consider creating a family financial mission statement outlining your values and long-term objectives. This document can guide future generations in managing their inheritance responsibly while maintaining the family’s wealth-building philosophy.

Thank you very much to my dear father, who taught me about the markets and helped me learn to trade since I was 13.

Yoni Assia, co-founder and CEO of eToro

Final thoughts

Building generational wealth requires patience, discipline, and a commitment to financial education that extends beyond your own lifetime. It is a marathon, not a sprint.

Focusing on long-term strategies, consistent saving, and smart investments, are key elements of any program aiming to create a lasting financial legacy. Take the first step today, and start building towards a more secure tomorrow.

Visit the eToro Academy to learn different ways of building a lasting investment legacy.

FAQs